Short positions on sterling helped to offset Brexit’s impact on U.K. equities, some firms have found.
William Blair & Co. LLC’s dynamic allocation team, which manages $2.6 billion of assets globally, used “game theory” to evaluate its position ahead of Brexit, said Tom Clarke, co-portfolio manager of William Blair’s dynamic allocation strategies in London. Around February and March, the team significantly reduced a long position on equities, protecting it with put options, and moved to a shorter position on sterling.
“That is how we went into June. The equity long got hit, but we had the sterling short, which helped.” The currency is no longer unattractive and has fallen enough that it looks cheap, he said. The team has now removed its option protection on equities, and moved to a longer position on sterling.
Robeco Institutional Asset Management’s investment solutions unit also hedged its sterling positions three months prior to Brexit. In the immediate aftermath of the vote, “we lost on the more risky assets, as stocks at first declined, but that was mostly compensated by the hedge on the pound,” said Lukas Daalder, chief investment officer of Robeco investment solutions, based in Rotterdam, Netherlands. Executives exited that short position about one month ago, but not out of choice. “Our impression was that most of the active managers were in the same short pound position — which was still our own line of thinking, but given that everybody was on the same side of the trade, things started to get risky.”
The firm made a “good profit,” and as the pound began to strengthen, which led to other investors taking their losses or profit, “we decided to do that before the market would turn completely the other way round. We closed our short position.”
In hindsight, he said, the risk of the pound strengthening and eroding profits on the hedge was smaller than executives thought, and the pound is now again weakening.
“We continue to believe the pound will weaken, which is why we are looking to get back in the short position, depending on market conditions,” said Mr. Daalder.
The weaker sterling is also making U.K. real estate assets cheaper for overseas investors.
“Since the (vote) result, there has been greater interest in U.K. property from international investors,” said Steve Grahame, CEO of North Row Capital in London. Ahead of the vote, executives at the alternatives money manager added an international aspect to its portfolio weighting, “protecting us from the uncertainty surrounding the outcome of the vote,” Mr. Grahame said. “After the unexpected result was announced, we increased our U.K. (real estate investment trust) position and have since taken some profits from this.”
However, Mr. Grahame said the fall in sterling, and a price discount to net asset value, “means that we are maintaining a high position in U.K. REITs.”